Awaiting election time CPI data with interest

July 20, 2010 at 10:54 pm Leave a comment

The Australian Bureau of Statistics would seem like an unlikely election game changer, yet their release of the usually fairly innocuous quarterly Consumer Price Index next Wednesday could have profound impact on the weeks to follow. In the minutes of the monetary policy meeting for 6 July released today, the Reserve Bank Board said the deciding factor on a rate rise next month would be the July CPI figure. The Board meets again on Tuesday 3 August and a high CPI number followed by a rate rise could give the Opposition a major impetus in the last 18 days of the election campaign.

The signs are there, that a rate rise is on the way. In the March quarter the headline rate was 2.9 percent with the all groups CPI rising 0.9 percent following a 0.5 percent rise the previous quarter. Hikes in the price of pharmaceuticals, vegetables, electricity and fuel were the main reasons for the March quarter increase. The Board said CPI inflation was expected to rise to a little above 3 per cent in the June quarter figures partly due to the effects of higher taxes on tobacco. “The important question for the Board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” they said.

Higher taxing cigarettes or not, several senior Government will be anxious smoking a few coffin nails which waiting for the CPI headline figure on Wednesday. The RBA have held interest rates at 4.5 percent for the last two months – still very low by Australian standards, but even a 0.25 percent rise is a bad look in the middle of a tight election campaign. In doorstops Opposition leader Tony Abbott has been hammering home the point of “upward pressure on interest rates” and while he blames government borrowing rather than new excises, an August rate rise would play into his campaign themes.

The cash rate has gone up seven times in the past year but this was after a historical low of 3.0 percent during the height of the Global Financial Crisis in 2009. However rates are still 2 percent lower than when Labor took office in November 2007 and also slightly lower than most of the period between 2001-2005 when the Howard Government dined out on the “low interest rates” they said their policies were responsible for.

Their promises were finally exposed as fiction as rates rose prior to the last election and they continued to do so when Labor took power. Playing politics with interest rates ignores the fact that the Reserve Bank Board is an entity independent of Government control. At a luncheon in Sydney today Glenn Stevens reminded the audience about that fact when the Board decision would not be swayed by the election campaign. He also said the CPI figure would not be the only decision factor. As today’s RBB minutes noted, the health of the European banking sector has a significant impact on financial markets and global confidence which could lead to an “updated reading on domestic prices”.

Neither major party likes to draw attention to this fact because it shows how little control Governments have over the wider economy. Ken Henry (himself an RBA board member) and the Treasury did a terrific job to keep Australia out of recession during the GFC but the economy and the interest rate was not immune from its devastating impacts. Rising interest rates means the economy is in good shape. Politicians and their media cohorts should be reminded of that fact whenever they play games with rate rises. Lower interest rates means either the China boom has ended or the European sovereign debt crisis has spiralled out of control. Either way, a $40 a month saving on the monthly mortgage won’t mean much if there is no job to pay for it. The media needs to tell this story fully instead of falling for phony political lines about “upward pressure”.

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